El Salvador’s international bonds offer 60% return in H1 2023

Despite last year’s economic challenges and policy turbulence, El Salvador’s international bonds have rebounded, offering a 60% return in 2023. El Salvador’s international bonds posted a 60% return in H1 2023 alone.

In July 2022, El Salvador had to handle tensions with Washington and the decreasing possibility of getting financing from the International Monetary Fund (IMF). In addition, there was uncertainty surrounding the decision to accept Bitcoin as legal tender. As a result, the value of El Salvador’s bonds declined significantly, dropping to just 25% of their original worth.

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However, the situation improved in H1 2023. El Salvador initiated two unexpected debt buybacks, alleviating the country’s payment obligations until 2027.

This move, coupled with appointing a former IMF official as an advisor to the finance ministry, has been perceived favorably by investors.

The enlistment of ex-IMF official Alejandro Werner rekindled hopes for a prospective IMF deal. His involvement could also lead to more structured policy-making.

As a result, the value of bonds due in 2025 has surged from around $0.27 a year ago to its current trading price of $0.89.

Recent data also shows Salvadoran bond prices are increasing, with the 2041 bond rising to $0.60. These bonds currently yield between 14% and 18%, marking them as the best-performing sovereign bonds in the first half of the year, with total returns nearing 60%.

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According to Aaron Stern from Converium Capital in Montreal, the bond prices in El Salvador did not reflect the actual situation last summer. Market concerns were focused on whether the government could fulfill its responsibilities.

Stern explains that El Salvador’s bonds offer a competitive value compared to several high-priced bonds in emerging markets.

According to Shamaila Khan from UBS Asset Management, President Nayib Bukele’s administration has prioritized continued access to the market, a crucial point considering El Salvador operates on a dollarized economy.

By December 2022, El Salvador’s debt-to-output ratio dropped to 77%, the lowest since 2019. Projections suggest a further decrease this year, followed by an uptick to 78% in 2024. The total public debt decreased from $25.4 billion at the end of 2022 to $19.7 billion in May.